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A Major Risk Starts Rising Again

Defying common sense, CEO pay once again begins to increase.

This year, more and more shareholders have stepped up to their responsibility as part-owners of their companies, pushing back against excessive, unmerited executive compensation. Yet even as stockholders show their displeasure, the gap between pay and performance at many companies may actually be widening.

Same shamelessness, different dayThis week, GovernanceMetrics International released a preliminary Executive Pay Scorecard Review, collating its previous scores from about one-fifth of S&P 500 companies thus far this proxy season. The organization flags any concerns it finds within the 10 metrics with which it assesses executive pay. And boy, did it find concerns.

Red-flagged policies have increased at a mind-boggling one-third of the companies assessed so far. Only a paltry one-eighth of the companies managed to decrease GovernanceMetrics' concerns about their compensation.

Among other findings, GovernanceMetrics revealed that three commonly criticized policies remain par for the course in S&P 500 companies' pay schemes:

Almost all S&P 500 companies award long-term incentives either without comparing those rewards to peer performance, or while performing worse than peer-group companies.

A shocking 89% of these companies allow fired chief executives to keep unvested stock, basically defeating the entire purpose of such awards (which are supposed to give chief executives incentives to stick around and run their companies for the long haul).

Three-quarters of CEOs still have "golden parachute" agreements that will give them at least twice their regular annual pay, should they vacate their posts.

Measuring up vs. dumbing downLet's focus on executives' supposed long-term incentives. "Shareholders expect executives to be rewarded for outperforming their peers rather than simply for a rising stock market," GovernanceMetrics noted. Yet 97% of the companies in its review don't require executives to beat their peers' median performance in order to earn long-haul rewards.

Despite the glaring lessons of the financial crisis, companies don't seem to have learned the value of rewarding long-term thinking. Though stocks have surged over the past few years, this bullish rally generally owes more to easy money from the Federal Reserve and other tacit government assistance than to outstanding corporate performance. Even the supposed improvements in businesses' productivity and profits often derive from harsh layoffs and other brutal cost-reducing measures. These cutbacks may boost net income -- and please shareholders -- in the short run, but they could also cripple companies' long-term competitiveness.

"Higher concern" companies should be concernedWithin its sample of 100 S&P 500 companies, GovernanceMetrics gave only 27% a "low concern" level on pay policies. If that percentage holds for the rest of the index, the odds suggest that companies we own face similar swings toward bad pay policies. Investors can't afford to ignore that possibility.

Thankfully, many shareholders have started speaking speaking out. Investor votes at major companies such as Hewlett-Packard(NYSE: HPQ), Beazer Homes(NYSE: BZH), and Shuffle Master(Nasdaq: SHFL) have already shot down down executive pay policies this year.

Now that say-on-pay is a required item on companies' proxy ballot, shareholders have more power than ever to stop such pillaging. And if GovernanceMetrics' findings so far this year are any indication, corporate managers and boards still need a loud, clear reminder that the world is watching what they do.

Check back atFool.comevery Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Author

Alyce Lomax is a columnist for Fool.com specializing in environmental, social, and governance (ESG) issues and an analyst for Motley Fool One. From October 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis. Follow @AlyceLomax